Funeral Insurance Offers Flexibility and Tax Advantages
Purchasing a funeral insurance policy to fund your anticipated funeral expenses is a popular alternative to a funeral trust with certain additional benefits. Funeral insurance offers protection against inflation, tax advantages, and the flexibility to choose any funeral home or cemetery. Specially tailored funeral insurance policies are available from various companies. These policies can be purchased from funeral service providers and their agents, as well as through insurance agents.
Fair Disclosure -- Funeralwise offers several funeral insurance plans in conjunction with a major funeral insurance company. These plans are promoted on this website.
What's the Difference between Funeral Insurance and Life Insurance?
Life insurance is an excellent means of providing financial security for your survivors. If your family depends on your income, life insurance can partially replace the income lost due to your death. Also, life insurance is a way to provide an inheritance for your heirs even if you do not have assets to leave them. To meet these objectives, most life insurance policies have a $25,000 or more minimum purchase. However, life insurance policies usually take weeks or months to receive the payout making them ill-suited to cover your final expenses including the cost of your funeral -- which is due at the time of the service -- and other current expenses that are immediately due such as credit card bills and medical bills.
Funeral insurance policies bridge this payment gap because they are specifically designed to cover your final expenses. Therefore, they can be purchased in amounts under $25,000 and they pay death benefits within a few days of filing a claim. This provides your family with immediate access to cash when they need it most … and enables them to work through the grief process without the added stress of paying your final expenses.
The lower policy amounts of funeral insurance make it a cost-effective alternative to regular life insurance plans. Funeral insurance also makes sense as a supplemental coverage because the proceeds of your regular insurance policy will not be depleted by your final expenses.
To Guarantee Your Funeral or Not, That is the Question
It is easiest to think of funeral insurance in the context of guaranteed vs. non-guaranteed funeral plans. When you sign a contract with a funeral provider (e.g., a funeral home) for the future delivery of funeral goods and services (i.e., your funeral), you can guarantee that contract by linking it to a funeral insurance policy. Under this arrangement the funeral provider "guarantees" that the price will not change. The presence of the funeral insurance enables the funeral provider to make the guarantee. Policies that are linked to a funeral contract are always whole life insurance plans that grow in value.
You do not need a funeral contract to purchase funeral insurance. Policies that are not linked to a funeral contract fall into the non-guaranteed category. These are usually similar to term life insurance, although whole life plans are available as well. You can purchase funeral insurance now and contract with a funeral provider later or let your survivors arrange your funeral when the time comes -- either way the policy will pay out to provide funds for your funeral. However, there is no guarantee that the insurance proceeds will entirely cover your funeral cost.
The Pros and Cons of Guaranteeing your Funeral with Insurance
Guaranteeing your funeral contract with insurance commits you to a funeral provider and locks in the price. If you have a preferred funeral provider, and are reasonably confident in that selection, you may feel secure in signing a contract with that provider and want to consider guaranteeing it with funeral insurance.
On the other hand, if you prefer to have the flexibility to choose a funeral provider at a later time, a standalone funeral insurance policy will provide financial security without the guarantee. This leaves you somewhat more susceptible to price inflation but you can minimize the risk by purchasing ample funeral insurance to cover your future funeral costs.
Guaranteed and non-guaranteed funeral plans are discussed in more detail below.
Funeral Contracts Guaranteed with Funeral Insurance
Many funeral homes offer funeral insurance in connection with their prearranged funeral contracts. A funeral contract specifies the funeral goods and services to be provided by the funeral home. This contract can be "guaranteed" by taking out a funeral insurance policy and naming the funeral home as the beneficiary. In this case, the funeral home guarantees the price of the specified goods and services and you avoid cost inflation by locking in today's prices. Even if your funeral happens many years from now it will not cost more than the contract amount assuming there is no change in the goods and services. When you die, the policy proceeds are paid directly to the funeral home to cover the funeral goods and services in your contract. The funeral home is protected because the funeral insurance policy has a growth factor that provides a hedge against inflation. Nonetheless, the funeral home is assuming the risk on the contract -- because if the rate of inflation is more than the policy growth rate, the funeral provider will receive less than their current price at the time of your funeral.
No Guarantees -- Funeral Insurance without a Funeral Contract
For maximum flexibility, you can purchase funeral insurance that is not linked to a specific funeral service provider. A popular version of standalone funeral insurance is called "final expense" because it is designed to cover not only your funeral costs but also other bills that may be due such as credit card bills, medical bills, legal fees and transportation costs. Final expense is essentially term life insurance. Whole life versions of funeral insurance are also available without the underlying funeral contract.
Its important to note the differences between final expense and whole life versions of funeral insurance. Final expense insurance stays in force as long as you are paying your premiums. Once you stop making premium payments, the policy lapses and the coverage ends. Therefore, you must keep final expense policies in force throughout your life time. Final expense plans are preferred by individuals wanting financial protection for end-of-life expenses at a manageable monthly cost.
Unlike final expense, whole life funeral insurance premiums are paid either in an initial lump sum amount or under 1-year, 3-year, 5-year or 10-year payment plans. Once you have paid the premiums in full, the funeral insurance policy remains in force until you die. Also, whole life plans have an investment component because the policy benefit amount grows over time at a rate set by the insurance company. This growth in the policy amount is designed to offset increases in funeral costs due to inflation. Whole life plans are preferred by individuals who want to securely set aside funds for their final expenses and keep pace with inflation with a growing death benefit.
When you purchase funeral insurance without a funeral contract, you will name the beneficiary of the funeral insurance policy -- either a trust, a family member or other responsible party. When you die, the proceeds of the policy will be paid to your beneficiary who will then pay the funeral provider. The provider will expect payment in full even if the payout from your policy is less than your funeral cost. Your policy should specify who is responsible for any deficiency as well as who receives any insurance proceeds in excess of the funeral cost.
Funeral Insurance has Tax and Estate Planning Advantages
Whereas interest income on trust accounts is taxable, the growth in death benefits on a funeral insurance policy are not subject to income tax. In addition, the cash value of whole life funeral insurance may qualify as an excluded asset to help you qualify for assistance from social service programs, such as Medicaid.
Be Aware that Funeral Insurance is Regulated by the States
Since insurance is regulated at the state level there are numerous variations in funeral insurance policies. Therefore, your state of residence will dictate the specific features of funeral insurance that are available to you. Also, since Medicaid is regulated by the states your funeral insurance policy may or may not qualify as an excluded asset for Medicaid purposes. If that is an issue, be sure to find out the rules before you buy funeral insurance.
View Additional Pages
What Does a Funeral Cost?
Advantages of Paying for Your Funeral in Advance
Pre-need Funeral and Burial Contracts
Funeral Trusts
Prepaying Funeral Providers
